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Submitted by Eugen von Bohm-Bawerk via Bawerk.net,

Iranian elections have supposedly put a very nice ‘moderate’ spin on Iranian politics in parliamentary ranks, and more importantly, Assembly of Experts composition. While it would be churlish to deny, it represents a significant step forward for President Rouhani’s agenda to 2017, albeit a number of vital caveats remain for how real any political shift actually is. We’ll do the Parliament first, and then move onto the Assembly second. With a ‘grand finale’ of what it means for Iranian Presidential outcomes, and associated production profiles at the end.

The first point to flag on the Showra is that it still actually remains more Conservative than moderate in composition (both of which are obviously relative terms in Iranian politics given 12,000 candidates were already barred from standing by the Guardian Council). The final composition of the 285 seat body will only be complete in May 2016 once votes are counted and around 50 second round run-offs are completed where 25% thresholds weren’t reached. But broadly speaking, we can expect more conservative creep in rural areas given moderate gains have already been counted in urban areas. Most notably taking all 30 seats in Tehran. That accounts for the vast majority of the 40 scalps won by the last minute ‘Reformist & Government Supporters (RSG) coalition thrown together under a Rouhani umbrella. The group broadly consists of pragmatic conservatives, centrists, and a sprinkling of reformers that undoubtedly did better than expected. But ironically the main reason for that was rather than picking the ‘wrong’ pre-screening fight with the Guardian Council, Rouhani, Rafsanjani and Mohammad Khatami oversaw a very clever broad church ‘branding exercise’ that essentially lumped them all into the same moderate RSG camp.

Despite that, the Conservative Comprehensive Principlist Alliance (CPA) still holds 41 seats, with further gains likely to be made in rural areas. It’s entirely true; the harder-line Steadfastness Front lost considerable ground on the political right. But many of the spoils didn’t go into RSG pockets; rather independent candidates picked up 58 seats as an eclectic political bunch instead. So much for all the numbers here, what are the political implications in play? While this undoubtedly gives Parliament a more moderate slant than it’s had since the early 1990s, it’s vital to note that political parties don’t really exist per se in Iran, but merely constitute loser coalitions and groupings. Moderates won’t ever vote as a unified bloc, which means Rouhani will have to keep tweaking his agenda to secure votes, and essentially still work with stauncher Conservative elements. In Western parlance, this is basically a ‘hung parliament’. In Iranian parlance, it’s a reasonable political balance where endless ‘camel-trading’ should allow for progress beyond hard line intransigence to be made. No more, no less. On no counts is this a ‘liberal panacea’.

Indeed, things get far more interesting when you turn to the Assembly of Experts. The headline news for the 88 member body is the conservative chair of the Assembly, Mohammad Yazdi and arch conservative Mesbah Yazdi, both lost their seats, while Rafsanjani, pragmatic cleric, Mohammad Emami Kashani and Rouhani himself, all got in as the leading names amongst Tehran’s 16 Assembly candidates. That matters not only because the body sits for eight year terms, but because ‘formally speaking’, it’s the primary organ responsible for selecting the next Supreme Leader (Rabhar) when Ayatollah Khamenei’s health gives out. A near certainty within the eight year window we’re looking at here. The naïve spin is this gives ‘moderate’ voices far more clout when the time comes. But a more realistic discussion of how that unfolds, actually reveals the true nature of the regime, and why recent elections don’t shift the political needle that much. Again, the first point to note is you have to separate what the Iranian Constitution formally states, and who’s actually going to calls the shots.

Sure, the Guardian Council, Expediency Council, the Assembly of Experts and even the sitting President will all have a say on the next Supreme Leader. But the fundamental power behind the ‘theocratic throne’ is ultimately going to be the Revolutionary Guards who’ll be working hand in hand with Khamenei to eventually anoint a successor. For some, that could portend a ‘collective leadership model’ where the Guards basically orchestrate a silent coup at the top towards ‘leadership by committee’. For others (and in our view a more realistic call), is any future leader will merely be far weaker than Khamenei to make sure any new Ayatollah is ultimately answering to the Guards, not the other way round.

Where Mr. Rouhani comes back into that loop, is far from directly challenging that outcome, he’s ultimately likely to quietly support it. For all the liberal pledges made in 2013 to ‘de-securitize’ Iranian politics, Rouhani comes from (and remains) part of the security establishment; aka he’s not any kind of threat to it. Any reform based impetus is entirely designed to prolong, reinforce, and if needs be, reinvent, the ‘revolution’ to maintain the status quo. That’s precisely why the Guards made its Faustian pact to push to the nuclear through with Rouhani, provided the core commercial (and ultimately political), gains ended up in their pockets. Strip away the ‘moderate gloss’, and the Guards remain the ‘political undercoat’ of the regime, with an extensive grip on business, military, and intelligence pallets across the board.

For our sharper readers, that presents a very interesting question for what Rouhani does next. Both in relation to the never ending ‘IPC saga’, and indeed the associated issue of 2017 Presidential elections. Being deeply cynical, as much as Rouhani has just given hard-liners a good electoral kick in the head, he’s arguably tightened the political noose around his own neck in the process. At this stage, Rouhani has absolutely no excuses if he can’t prove that nuclear opening was the way to go ahead of Presidential polls in terms of big ticket investments into the Islamic Republic. He has the green light with the IAEA; to casual observers, he has the green light from ‘a new look’ Parliament that shouldn’t throw too many spanners in the FDI works. He even has a say in the succession debate, both as sitting President, and securing his seat on the Assembly of Experts. But in reality, his political window is very short here. Unless Rouhani can finally get the IPC ‘to market’ by May 2016, currently stuck in deep political weeds between the drafting committee and NIOC who can’t agree on credible terms in a low price environment, we think the President will have no choice but to ditch any hope of the IPC coming through, and start brokering bilateral deals instead.

That’s likely to be the case with European IOCs, where Iran clearly wants them ‘front of house’ as prospective operators. Flimsy MoU’s won’t cut it much longer in Iran; Rouhani needs firm deals and hard European cash in the bank at this stage. He’ll also have to blink first when it comes to Chinese haggling if Iran wants to get to grip with massive infrastructure gaps in rail, roads and ports. That’s not to mention making sure Iran has a decent insurance policy from broader international investors, just in case the US has any snap back second thoughts come November 2016 Presidential polls. Without cash injections in place, any economic openings are going to come up very politically short for Mr. Rouhani, and especially outside Tehran in likes the likes of Qom. Given Iran has already announced real term 5.6% budget cuts next year, Rouhani knows he remains the potential fall guy here. Sure, the 2017 Presidency probably remains his to lose right now. But 12 months is a very long time in Iranian politics to April 2017. Moderate smoke, Conservative mirrors. It’s the way of Iran’s political future.

via Zero Hedge http://ift.tt/21LvAAl Tyler Durden

Only in America's so-called democracy could a proven "loser" so vehemently and shamelessly condemn a current "winner" with the goal of overturning 'we, the people's' prospective leader in favor of himself. In the latest (and most desperate) action from the neocon establishment, CNN reports Romney has instructed his closest advisers to explore the possibility of stopping Donald Trump at the Republican National Convention (by revising rules for instance). As The GOP self-immolates, perhaps Romney – as the mouthpiece of the establishment – should pay heed to Florida Governor Risk Scott who explained "I trust the voters, so I will not try to tell the Republican voters in Florida how to vote." Democracy, indeed.

Following his attack speech this morning, CNN reports that Romney is quickly mobilizing Plan B…

Mitt Romney has instructed his closest advisers to explore the possibility of stopping Donald Trump at the Republican National Convention, a source close to Romney's inner circle says.

 

The 2012 GOP nominee's advisers are examining what a fight at the convention might look like and what rules might need revising.

 

"It sounds like the plan is to lock the convention," said the source.

 

Romney is focused on suppressing Trump's delegate count to prevent him from accumulating the 1,237 delegates he needs to secure the nomination.

 

But implicit in Romney's request to his team to explore the possibility of a convention fight is his willingness to step in and carry the party's banner into the fall general election as the Republican nominee. Another name these sources mentioned was House Speaker Paul Ryan, Romney's running mate in 2012.

Because nothing says "success" like an old establishment "loser" when the American people are screaming out for change… and not this kind of change (again)…

According to the source, CNN reports that Romney does not expect Rubio, Cruz or Kasich to emerge as the single candidate that can accumulate 1,237 delegates and outright defeat Trump before the convention. So the only way to rob Trump of a victory would be to keep him from reaching that magic 1,237 number.

Most Republican states allocate their delegates proportionally, or in a hybrid format that gives delegates both to the statewide winner and at the congressional district level. This means rather than winnowing the competition down to a single Trump alternative, it could make more sense for all of the current candidates to stay in the race for a stop Trump movement, according to one source.

 

In addition, two senior Republican Party insiders told CNN that the convention scenario is now dominating a lot of conversation in GOP fundraising circles. To be sure, both of these sources are skeptical about Romney being able to execute this plan, but both believe that there is a real attempt underway to try to do this.

Even Lou Dobbs was shocked…

"@MittRomney and @SpeakerRyan are despicable. They are absolutely dishonorable," says @loudobbsnews http://pic.twitter.com/4E9cGVHyee

— FOX Business (@FoxBusiness) March 4, 2016

Perhaps Mr Romney should listen to Republican Florida Gov. Rick Scott:

Republican Florida Gov. Rick Scott is not endorsing a candidate in the party's presidential race ahead of his state's March 15 primary.

 

"I have made it my practice to not get involved in primaries because picking the Republican candidate is the voters’ job," Scott wrote in a statement posted to Facebook on Thursday.

 

"The political class opposed me when I first ran for office, they did not want a businessman outsider, but the voters had other ideas," he said.

 

"I trust the voters, so I will not try to tell the Republican voters in Florida how to vote by endorsing a candidate before our primary on March 15," Scott continued. "I believed in the voters when I first ran for office, and I still believe in them today."

Ah – we love the smell of democracy in the morning; or is that the burning smell of a Republican party on fire? As The Patriot Post's Nate Jackson so eloquently sums up the farce:

Millions of Americans are fed up with the establishment of both parties. And the Republican base is fed up with nominees like Bob Dole, John McCain and Mitt Romney, all of whom lost to younger, more energetic and appealing Democrats. So naturally, the solution to that frustration yielding the rise of Donald Trump is to … roll out Mitt Romney to denounce him. That’s exactly what the last GOP presidential loser did Thursday.

…

But the most important takeaway is that the messenger is deeply flawed, which will only reinforce in the minds of Trump supporters that they should stand by their man.

That said, Romney’s speech isn’t for Trump supporters. It’s to stem the tide of elected Republicans conceding the nomination to Trump without continuing to fight.

Romney lost in 2012 because he implemented ObamaCare in Massachusetts before there was ObamaCare. He was a moderate technocrat who spoke conservatism as a second language. That doesn’t mean he would’ve been a bad president; on the contrary, his generally non-ideological philosophy and his history of turning around both companies and the Salt Lake City Olympics perhaps uniquely qualified him to serve at that moment in American history. But he lost, despite the fact, as Trump said, he “should have beaten Barack Obama easily.”

Even Trump’s endorsement couldn’t save Romney in 2012.

…

Going forward, Romney’s advice is simple:

“[T]he rules of political history have pretty much all been shredded during this campaign. If the other candidates can find common ground, I believe we can nominate a person who can win the general election and who will represent the values and policies of conservatism. Given the current delegate selection process, this means that I would vote for Marco Rubio in Florida, for John Kasich in Ohio, and for Ted Cruz or whichever one of the other two contenders has the best chance of beating Mr. Trump in a given state.”

Translation: Aim for a brokered convention. If Trump loses in such a way, however, it would surely drive away Trump supporters, and Trump himself would no doubt launch a third-party run after having been not “treated fairly.”

So we have many in the establishment signaling they would be just fine with a Washington dealmaker like Trump — Chris Christie, Mike Huckabee and others come to mind, but also conservatives like Jeff Sessions. And we have conservatives like Sen. Ben Sasse and a growing list of others who vow not to support Trump. Many among the conservative intelligentsia (for lack of a better word) also have declared Trump unacceptable. Meanwhile, Marco Rubio, Ted Cruz and John Kasich show no signs of exiting the race, even amidst growing calls on the Right for a Cruz/Rubio unity ticket.

Now we have the two previous Republican nominees denouncing the current Republican frontrunner. Are we witnessing the collapse of the Grand Old Party? And is there any way to win a gimme election this year with such a fractured party?

Source: Ben Garrison

And in tonight's debate (the 23781st we believe), Trump destroys Romney with his response to the first question:

"He was a failed candidate. He should have beaten President Obama very easily,"

 

"He failed miserably. And it was an embarrassment to everybody, including the Republican Party."

 

"So I don't take that. And I guess obviously he wants to be relevant. He wants to be back in the game."

via Zero Hedge http://ift.tt/21IqoRf Tyler Durden

Roughly four year after our readers were well aware that contrary to infantile suggestions that the US consumer is deleveraging, and was instead being burried under trillions in new auto and student loans…

 

… the Fed has finally “figured it out.”

Consumers across the country are borrowing more to buy cars and go to school https://t.co/mkKAoVya2o http://pic.twitter.com/DxMiHo7kki

— St. Louis Fed (@stlouisfed) March 3, 2016

Since we have said everything there is to say on the topic, here is the shocked Fed discovering that it has enbaled the biggest consumer debt spree in history.

And yes, before you ask, taxpayer money was spent on this “study.”

From the St. Louis Fed

What Has Happened to Consumer Debt Since the Great Recession?

In Figure 1, total real per capita consumer debt for the nation and the Eighth District is presented relative to their respective balances in 2003 to compare debt growth. Between the first quarter of 2003 and the third quarter of 2008, total per capita debt in the nation increased around 50 percent. Much of this rise stemmed from increased mortgage borrowing. From that peak, per capita debt declined until the second half of 2013, a process known as “deleveraging” whereby consumers discharge or pay down debts. After reaching a turning point in 2013, total per capita debt has been growing at a gradual pace in the District and has been essentially flat for the nation.

The pattern for consumer debt growth in the District is similar to that of the nation, although there are some important exceptions. In particular, the run-up in debt was milder than that observed for the nation. More affordable house prices within the District played a big role in moderating the growth of overall mortgage borrowing. In turn, this protected consumers from the worst of the housing crash. While the District did deleverage, the intensity was much milder.

Borrowing for Higher Education and Automobiles Are Driving Debt Rebound

Consumers across the country are borrowing more to finance car purchases and pursue higher education. For both the nation and the District, student and auto loans combine for around 90 percent of debt growth since the fourth quarter of 2012. In Figure 2, the remarkable growth is reflected by the average amount of auto and student debt held by borrowers. Average auto debt grew at a similar rate to student loans since the close of 2010. However, unlike auto loans, the recession did little to slow the growth of student loan balances. Since 2003, the average student loan balance has increased by more than 58 percent.

Some reports argue that part of the slow recovery is due to recent graduates paying down student debt rather than buying houses and other goods. Figure 3 breaks down the growth in both student debt and auto debt by age groups and highlights the groups generating the majority of the economic activity.

The vast majority of new student loan debt is concentrated in younger age groups. Coupled with consistently rising average balances, this heavy concentration of new debt among the young supports the theory that these borrowers will experience headwinds in the form of a longer deleveraging period before other spending or saving decisions may be financially sound. In contrast, much of the new auto debt is concentrated in the older age groups. This is especially true for the District, where 61 percent of new auto debt was accumulated by individuals age 56 and above.

Serious Delinquency Rates Tell a Story of Financial Hardship

As borrowers encounter unexpected setbacks—both financial and otherwise—they are more likely to fall behind on loan payments. If the duress is prolonged or worsens, then borrowers’ loans may fall into serious delinquency (defined as a payment is overdue by at least 90 days). Figure 4 shows the serious delinquency rates for both student loans and auto loans.

Intuitively, the rate for auto loans rose during the recession and peaked at close to double the pre-recession rate. The rate for student loans also rose over the same period, but never declined substantially. However, these delinquency rates likely understate the effective delinquency rates, because many student loans are in deferment, grace periods or forbearance and are temporarily not in the repayment cycle.

The implications of these alarmingly high rates is not immediately clear, especially given that many student loans cannot be shed in personal bankruptcy. However, a large share of young borrowers saddled with severely delinquent loans may inhibit aggregate economic growth as this group is unable to participate in other economic activities, such as buying a home or saving for retirement.

Borrowing Differs Greatly Across Large Cities

Data at the MSA level in the Eighth District also show different experiences for borrowers. As seen in Figure 5, Memphis’ student debt growth in 2015 well outpaced that of the nation and other large District cities.

Serious delinquency rates for student debt rose across every city, while the rate fell for the nation as a whole. Of note, Louisville experienced a sharp increase over the year, representing the highest point in 13 years.

For auto debt, borrowers in each large city, as well as the nation, were accumulating debt at a rapid rate. Serious delinquency rates for auto debt largely held steady and were a quarter of the rate for student loans. This largely reflects the greater financial security, on average, for borrowers in older age groups.

Further Analysis Ahead

This powerful dataset will allow us to monitor these statistics and several others across a wide range of geographic areas. In the next quarter, we will showcase trends for consumer debt across the nation, District and large District MSAs. Ultimately, we hope to provide valuable information to policymakers, business leaders, nonprofits and others interested in following this key component of household balance sheets.

via Zero Hedge http://ift.tt/1SmH3E0 Tyler Durden

Having risen to its highest level ever in August 2015, the volatility of volatility has collapsed. As traders position increasingly for negative interest rates in the US, the last month has seen ‘uncertainty’ crash to its most complacent in over 18 months.. and all this as well-chosen data corners The Fed (if it was truly data-dependent) to hike rates (or at best make hawkish over tones). Perhaps this is peak complacency ahead of tomorrow’s do-or-die jobs data?

 

VVIX (the estimate of the uncertainty of the cost of insuring equity risk) has tumbled to its lowest level since the end of QE3…

Chart: Bloomberg

 

As we noted recently, it seems the VIX derivative market is expecting more easing. QE? Unlikely. But NIRP maybe… as bets on The Fed going negative soar to record highs…

Chart: Bloomberg

via Zero Hedge http://ift.tt/1TcE2r9 Tyler Durden

Earlier today we showed how, courtesy of massive synthetic positions where Oil ETFs are currently net long 272k lots of oil, equal to 56% of the front month open-interest in futures, the price of oil is being propped up by ETF buying, either outright or via an ongoing, relentless short squeeze.

 

This was to be expected: as we warned a little over a month ago, as a result of a record number of oil shorts, there is a “constant threat of a short squeeze.” As SocGen further elaborated, “a positive surprise could happen quite sharply, as short positions are likely to be squeezed by a profit-taking move. On WTI, the in-the-money short positions are really dominating at the front end of the curve while out-of-the-money long positions are dominating at the long end of the curve: the front end of oil curve could thus be more exposed to some profit-taking.”

It certainly has.

Today, one Wall Street firm confirms that indeed the recent move in oil has nothing to do with fundamentals, and everything to do with positioning, and as UBS explains, “the performance is TOTALLY short-squeeze led.“

Here’s why:

RECENT ACTION/ SENTIMENT:

 

Yesterday oil ended in the green despite a very large reported crude inventory build, a reflection of how biased to the downside sentiment and positioning already is. Today, crude started in the read and has been mixed from there but moving higher. And both days, the stocks have lead with energy the best performing subsector in the S&P.

 

Now, there is no doubt that the performance today is TOTALLY short-squeeze led. Though it also shows how negative sentiment and positioning is.

 

Interestingly, with energy outperforming the market the last few days for the first time in a very long while, I actually got a few long only generalist type calls yesterday. Nothing concrete but generalists who are underweight the space trying to figure out if this is a turning point…
 
WHAT HAS HELPED FUEL THIS SHORT SQUEEZE?

• Positioning and sentiment very biased to the short side/ underweight. And as we move up, the move is also exxacerbated by short gamma positions that have to cover at higher levels.
• Despite high oil inventories (and still building), most upstream producers (from Exxon on down) have guided to lower than expected production as a result of lower capex.
• Ongoing hopes of a potential agreement between OPEC and non-OPEC members (seems umlikely but now a meeting set for March 20th is reviving some market hopes).
• A couple of supply issues like Kirkuk/Ceyhan pipeline damage taking longer to repair than expected and Farcados force majeure in Nigeria still on going issue.
• Credit players covering equity shorts — evident today that “good credit names” are underperforming and “bad credit names” outperforming.
• We took a day break from equity issuances in the space ystd and this morning… despite energy’s strong performance. Though rest assured we haven’t seen the end of issuances yet (RRC WLL, RSPP, MUR, CRZO GPORare all top of mind)… by the same token all this energy issuances are helping the credit side of things which has also been the culprit of the issue.

 

One may wonder if the squeeze is forced, or simply momentum driven, although we would like to quickly point us that most of the recent equity offerings by O & G companies who have benefited from the rally have noted in the “use of proceeds” that the raised capital would be used to pay down secured debt, i.e., take out the banks. In other words, it is as if the banks are orchestrating a squeeze to allow the shale companies to raise capital which will then allow them to repay their secured debt to the banks, secured debt whose recoveries as we have recently shown are practically non-existent in bankruptcy.

 

Which in turn means that all that is happening is a new layer of equity is coming in to take out the same banks who, as we recented noted, no longer have an interest in being in part of the capital structure. Impossible, you say? Recall what MatlinPatterson’s Michael Lipsky said two weeks ago:

“we always assume that secured lenders would roll into the bankruptcy become the DIP lenders, emerge from bankruptcy as the new secured debt of the company. But they don’t want to be there, so you are buying the debt behind them and you could find yourself in a situation where you could lose 100% of your money.”

Which leads us to the most important question: if the oil recovery is “real” why are the banks in such a desperate scramble to get the hell out of Dodge?

As for what this means for returns to new equity investors, we believe the answer is self-evident.

via Zero Hedge http://ift.tt/1UD6zpd Tyler Durden

Lesser of two evils?

 

 

Source: Townhall.com

via Zero Hedge http://ift.tt/1VU36B0 Tyler Durden

In the past three months we have repeatedly showed that, despite the recent modest rebound off the all time lows, the bottom is about to fall out of the dry bulk shipping market in articles such as these:

• It Is Now Cheaper To Rent A Dry Bulk Tanker Than A Ferrari
• A “Perfect Storm Is Coming” Deutsche Warns As Baltic Dry Falls To New Record Low
• “Nothing Is Moving,” Baltic Dry Crashes As Insiders Warn “Commerce Has Come To A Halt”
• World’s Biggest Containership “Hard Aground” As Baltic Dry Crashes Below 300 For First Time Ever
• The Next Big Leg Lower In The Baltic Dry Is On Deck: 360 New Vessels Are About To Be Delivered

Overnight, the CEO of Dry bulk shipper Golden Ocean Group, Herman Billung spoke before an industry conference in Oslo, and made it clear that our worst-case expectations may prove to be optimistic.

Photo: Golden Ocean Group

He said that Dry Bulk shippers should expect little respite for another two years, adding that an enormous oversupply of vessels isn’t sustainable: “It’s a fair assumption to make that only half of the orderbook in 2016 will be delivered.”

He warned that “in the coming months there will be a lot of bankruptcies, counterparty risk will be on everybody’s lips.”

Useful tip: any time a CEO is warning about counterparty risk, it’s probably a good idea to listen.

Just to emphasize his point to the local audience he said that “The market has never been this bad before in modern history. We haven’t seen a market this bad since the Viking age. This is not sustainable for anybody and will lead to dramatic changes.”

Yes, it’s that bad.

And what’s worse, is that once Billung is proven to be right and the dry bulk bankruptcy tsunami is unleashed sweeping away hundreds of ships with it, the next question will be just which  (mostly European) banks, have the greatest “secured” loan exposure to the dry bulk industry, a sector where we fully expect recoveries on secured loans to be in the pennies on the dollar.

via Zero Hedge http://ift.tt/1TTHc2U Tyler Durden

Submitted by Mark Brandly via The Mises Institute,

Lately, I’ve wondered how my neighbor, Sam, affords to buy so much stuff. He appears to have an unlimited budget.

When I asked him about this, Sam asked, “Do you think I’m spending too much?”

 

“That depends,” I said, “How much money do you make?”

 

“I take home $100,000 a year.”

 

That surprised me. I would guess that he’s spending more than that. But I tried to be encouraging, “That sounds like plenty of income. With a little planning, you should be able to budget your spending and be financially stable.”

 

“But my finances are a mess,” Sam replied. “I spend more than I take home. Last year I had to borrow $12,000 just to cover my spending.”

 

“Well maybe things will be better this year,” I said, hoping that Sam’s spending issues was a one year problem.

 

“No,” Sam replied. “Actually, in the first three months of this year, I’ve already spent $19,000 more than I’ve made. It looks like my budget deficit this year will be much worse than it was last year.”

Now I was starting to worry. “Have you been borrowing money to cover your spending for a long time?”

 

“Oh yes. I have a lot of debt. Part of the problem is that I owe myself $150,000.”

 

I wondered if Sam misspoke, “Wait, wait, wait, you owe yourself $150,000? Why do you think that you’re in debt to yourself?”

 

“Well you see, over the years I promised myself that I was going to use my paychecks to pay for a fund for my children’s education, but instead of spending $150,000 on colleges, I spent the money on other expenses. So I figure that I owe myself this money so that I can pay for my children’s college tuitions.”

Obviously Sam doesn’t understand the definition of the word “debt.”

I tried to be polite in my response:

“That doesn’t make any sense. It’s true that you’ve made some horrible decisions regarding your spending, but it’s ridiculous to claim that you owe yourself money. A debt occurs when one person owes another person money. Just because you changed your mind about how to spend your paychecks doesn’t mean that you’ve borrowed money from yourself.

 

“So the first thing you need to do is to think clearly about the amount of debt you have. You don’t owe yourself any money. Now, forgetting about this ridiculous notion of self-debt, how much do you owe?”

 

“Alright, I think I see your point. Let’s just talk about the rest of my debt. I owe various banks about $420,000. This debt is more than four times my take-home income.”

Sam often lies about his income and spending issues, but he always understates his budget problem. If he’s lying now, then I can be sure that the problem is even greater than he says. I wanted more information.

“That a pretty high debt to income ratio. But that might be somewhat manageable, although unwise, if you’ve borrowed that money at low interest rates.”

 

“I have some good news and some bad news,” Sam said. “Interest rates are low. In fact, in the last fourteen years, my debt has more than quadrupled, but my interest payments have increased less than 50 percent. That’s because interest rates have collapsed during that time. Isn’t that good news?”

 

“I suppose, but do you know that interest rates are going to increase over the next several years?”

 

“Yes, that’s the bad news. In the past year, I only paid $7,000 of interest, but within ten years my debt will increase over 50 percent, and possibly much more, and with higher interest rates I expect to be paying at least four to five times that much in interest annually.”

 

“That’s a huge problem. So to be able to make your loan payments, I assume that you’ve taken out some long-term loans.”

 

“No, no, no. In order to take advantage of the low interest rates, most of my borrowing is short term. I rollover my loans quickly. In the past year my principal payments on these loans totaled $207,000.”

“Let me get this straight. Your loan payments, including principal and interest, are well over twice your take home pay?”

 

“Yes, I take home a little over $8,000 per month and my loan payments are over $17,000 per month. But it’s no problem. In the past year I borrowed $223,000 to cover everything.”

Shocked, I said “How can you say borrowing more than twice your income is not a problem?”

“I simply borrow all the money I need to make all of my loan payments. I never pay any of the loans down. I’ve been doing this for years, ever since I started spending more than I make.”

 

“Okay. Most of your borrowing goes to cover your increasingly large principal and interest payments. And as interest rates rise, interest payments will become a bigger percentage of your spending.

 

When that happens, your total debt will increase faster than your income. What is your plan, say in the next ten years, to correct this situation?”

 

“Well I don’t have a plan for correcting anything, because I don’t see how I can cut my spending.”

 

“What if the banks stop loaning you money to make your payments on your loans? What happens then?”

 

“I guess I’m assuming that won’t happen.”

Sam’s Budget Situation in Real Numbers

If one of our neighbors budgeted in this manner, we would obviously conclude that the guy is crazy. No such plan could work. Eventually lenders would refuse to fund Sam’s spending.

However, Sam’s situation looks a lot like the federal government budget plan. Take a look at some recent federal budget information and some Congressional Budget Office projections:

• In FY (fiscal year) 2015, the feds had a budget deficit, counting only debt held by the public, of $339 billion, which is about 10 percent of their tax revenues of $3,248 billion. The deficit has been declining the last few years, but that is now changing.
• In fact, in the first three months of FY 2016, according to the Treasury Department, federal debt held by the public increased $548 billion. Admittedly, some of this debt was due to the fact that the feds were cooking the books in FY 2015 when they hit the debt ceiling limit. Nonetheless, the first quarter 2016 deficit is already 60 percent larger than the overall 2015 deficit.
• The federal government claims to owe itself over $5 trillion (they call it intragovernmental debt here). This $5 trillion represents tax revenues that were earmarked for specific spending programs, such as Social Security, but were spent on other programs. Since the feds collected taxes to pay for Social Security, but spent the money on something else, they conclude that they owe it to themselves to collect those tax revenues again. That’s the essence of intragovernmental debt. We should not count this as debt. Give the Treasury Department credit for ignoring this type of “debt” in their Daily Treasury Statements and in their end of the year debt reports.
• As of September 30, 2015, the feds had $13.1 trillion of debt owed to the public. FY 2015 tax revenues totaled $3.248 trillion. So just like Sam the government has a 4 to 1 debt to tax revenue ratio.
• In the past fourteen years, from September 30, 2001 (the start of George Bush’s first budget) to September 30, 2015 (the end of Barack Obama’s sixth budget), debt owed to the public increased from $3,339.3 billion to $13,123.8 billion. That’s an increase of 293 percent.
• According to the Daily Treasury Statements, in the past fourteen years, interest on treasury securities increased from $162.5 billion in fiscal year 2001 to $233.1 billion in fiscal year 2015. That’s a 44 percent increase during the same period when federal debt owed to the public almost quadrupled.
• In FY 2015, again according to the Daily Treasury Statements, the feds borrowed $7,251.4 billion (see the Public Debt Cash Issues for September 30, 2015), an average of almost $20 billion per day. They spent $6,740.3 billion of this borrowing rolling over their debt. So, Federal principal and interest payments are more than double federal tax revenues.
• According to the Congressional Budget Office’s baseline projections, debt held by the public in 2025 should exceed $21 trillion and during that time interest rates are expected to increase. Interest rates have been kept artificially low for years. If interest rates return to a more normal level, say to the rates they were paying when George Bush took office fifteen years ago, then interest payments in 2025 will exceed $1.2 trillion. That’s over a 400 percent increase compared to the FY 2015 interest payments. I should note here that the baseline budget projections are optimistic. We should expect the debt situation in 2025 to be significantly worse than these projections.

The federal government’s debt has exploded under the Bush and Obama administrations. Low interest payments due to the low interest rates have masked their budget problems. As interest rates and the spending gap on entitlement programs such as Social Security both increase, the budget problem will compound.

The government’s plan is to borrow all of the money they need to pay all of their principal and interest payments and to also pay for the budget deficits in their spending programs. The question we should ask is: what’s going to happen when the world’s lenders refuse to bankroll DC’s spending schemes?

via Zero Hedge http://ift.tt/1oTgiLz Tyler Durden